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Hotel Energy Costs; Not So Shocking News

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Atlanta, May 31, 2005: Entering 2005, news of oil exceeding $50 a barrel and gasoline rising far above $2 per gallon made hotel owners and operators wonder whether rising utility costs and declining demand will stymie the industry recovery. Fortunately, it appears that the U.S. lodging industry will not experience any significant negative impact from the recent spikes in energy costs. This conclusion comes from a special analysis of the data collected for the recently released 2005 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.

“Yes, energy costs at U.S. hotels increased 6.0 percent in 2004, following the 5.9 percent jump in 2003,” said R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR. “Many industry participants contemplating the impact of the $50 per barrel issue vividly remember the days of high fuel costs and long lines at the gas pump in the 1970s. During that period, however, hotel energy costs grew an average of 11 percent annually, far greater than the increases seen in the past two years.”

“In addition, strong gains in RevPAR have kept utility department expenses at an average of 4.2 percent of total revenue. This is perfectly in-line with the long-term benchmark for this department,” Woodworth commented.

When analyzing the effect of rising oil prices on the hotel industry, PKF-HR breaks it down into direct impacts and indirect impacts. Indirectly, rising gas prices affect consumer travel patterns, as well as the cost of goods purchased by hotels. Directly, hotels will have to pay more for electricity, gas, and fuel.

“According to the Travel Industry Association, gas prices have not impacted the number of trips taken by Americans. We continue to observe increases in the demand for hotel rooms and are projecting the highest summer occupancy rates since 2000,” Woodworth noted. “The bump in operating expenses is where we have seen the most impact on hotels. Fuel surcharges have started to pop up on the bottom of invoices for the delivery of goods and supplies purchased by hotels. In addition, hotel utility bills are on the rise; electricity has gone up 4.1 percent, gas/fuel 10.7 percent, and water/sewer 7.2 percent.”

Utility costs are just some of the 200 discrete hotel revenue and expense items captured by PKF-HR for its 2005 Trends in the Hotel Industry report. The 2005 report marks the 69 th annual review of U.S. hotel operations conducted by PKF. This year’s sample draws upon year-end 2004 financial statements received from more than 5,000 hotels across the country.

Resorts Pay The Price

Because of the vast extent of services and amenities offered by resort hotels, it is not surprising that these properties not only pay the most for utilities, but have also seen the greatest increase in energy costs. “The typical resort not only has guest rooms and public spaces like other hotels, but you’ll usually find multiple food and beverage outlets, extensive meeting space, expansive grounds, and numerous recreational departments such as golf, spa, water parks, horse stables, and skiing. All of these additional spaces and functions require energy for heating, air conditioning, and maintenance,” Woodworth said.

The second biggest consumers of energy were convention hotels, also with significant meeting space and food and beverage requirements. Limited-service hotels had the smallest demands in 2004.

Cooling Off In The South

When analyzing the Trends utility data by region, PKF-HR finds that the greatest increases in 2004 energy costs occurred in the South Atlantic and South Central regions. Hotel utility expenses grew 9.2 percent and 7.3 percent, respectively, in these regions during the year. “Apparently, running your air conditioner year-round was more costly than the heating oil and steam needed keep the northern hotels warm during the winter,” Woodworth quipped. Hotels in the North Central region benefited from the lowest rise in energy costs at 2.0 percent.

Revenue To The Rescue

According to Craig Thomas, Chief Economist at Torto Wheaton Research, there are three potential scenarios for oil prices in the future.

  1. Prices fall back to the $40 a barrel range.
  2. Oil prices stay high - where they are now.
  3. Prices continue to rise.
Of the three scenarios listed above, Thomas believes that high oil prices are here to stay.

If so, then PKF-HR believes that hotel utility expenses will continue to rise at roughly the long-term average of 6.0 percent. Fortunately, the near-term outlook for hotel revenue growth is 7.4 percent. “As we’ve seen in the past, strong revenue growth will mask the increases in operating expenses absorbed by hotels,” Woodworth said. “With strong labor requirements and relatively fixed expenses like utilities, the lodging industry historically has seen its costs of operations increase at a much greater pace than other industries. You cannot automate most front-of-the-house functions, and you can only control your energy consumption to a certain degree.”
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U.S. HOTEL UTILITY COSTS
By Property Type
2004 Dollars Per Available Room

Source: PKF Hospitality Research
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CHANGE IN U.S. HOTEL UTILITY COSTS
By Property Type – 2003 TO 2004

Source: PKF Hospitality Research
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CHANGE IN U.S. HOTEL UTILITY COSTS
By Region – 2003 TO 2004

Source: PKF Hospitality Research
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U.S. HOTEL UTILITY COSTS
2004 Breakdown of Expenses

Source: PKF Hospitality Research
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TOTAL REVENUE vs UTILITY COSTS
Annual Change - 1970 to 2004

Source: PKF Hospitality Research
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Copies of the 2005 Trends in the Hotel Industry report, which provides owners, investors, property managers, asset managers and others with detailed information on all aspects of hotel revenues, operating costs and profits, are available at PKF’s online store at www.pkfc.com, or by calling Claude Vargo toll free at (866) 842-8754.

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.

Contact:

R. Mark Woodworth
Executive Managing Director
PKF Hospitality Research
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150, ext 222

Also See: Hotel Utility Costs; Surge Protection Is Needed / PKF Consulting / March 2004
Double-Digit Profit Growth for U.S. Hotels in 2004 and 2005; Strong Revenue Growth Overcomes Some Expense Concerns / PKF / February 2005


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